What is Main Reserve
MAIN RESERVE – is a premium reserve owned by insurance participants which will usually be calculated every mid-year. Reserve Premium itself is defined as money collected by the insurance company that comes from the difference in the value of compensation with the value of claim payments that will be paid by the company in the future if there is a claim. Usually the actuary who calculates this premium reserve must be based on regulations that have been legalized by the relevant Directorate General of Financial Institutions.
The calculation of premium reserves also differs from one insurance to another because there are various types of insurance companies such as life insurance, health insurance, education insurance, vehicle insurance, loss insurance and so on. So the calculations themselves are different as has been determined by the Minister of Finance Number 80/KMK.04/1995 and based on Law No. 7 of 1983 Article 9 Paragraph (1).
The calculation of premium reserves is done by the actuarial mathematical calculation method and can be done in 2 ways, namely the prospective method and the retrospective method. For the determination or calculation of the reserve premium itself, there are several methods (methods) that can be used such as the Zilmer Method, the Gross Premium Valuation (GPV) method, the different formula premium method and so on according to the type of insurance company.
Main Reserve Function
As a company reserve fund that can be needed at any time
As a company’s obedience in following government regulations (minister of finance) and laws to provide reserve funds
Can be used to spin profits in other forms of low-risk investments
Main Reserve Benefits for Customers
The benefits of Main reserve or reserve premium for customers of course provide peace to customers because they can make claims at any time when something unexpected happens. In addition to this type of investment insurance, the policyholder will also benefit from this premium reserve because of its status as the policyholder’s property in the form of insurance benefits, for example in Unit Link insurance.
Main Reserve Benefits for Insurance Companies
For companies, the existence of this Main Reserve can be used to get additional profits, namely by managing and putting it into other investments that have a low level of risk, such as government bonds or mutual funds. Even just from the investment results of this reserve premium, at the end of the contract the policyholder (insurance participant) the cash value obtained is equivalent to the sum assured or insurance claim.
In addition to providing benefits, the Main Reserve is also used as a form of liability for insurance companies in fulfilling claims submitted at any time and showing that their business activities are in a healthy condition. With proper management and calculation of premium reserves, the company will always have a good reputation.
In the world of insurance, Main Reserves are the main reserve funds used to finance policy payment obligations and company operational costs. In simple terms, Main Reserves is the difference between the number of policies paid by customers and the amount of funds issued by the company to pay claims.
Usually the calculation will be done every 1 semester or in the middle of the year and at the end of the year. In accumulation, Main Reserves can be used to review all customers or individuals. The purpose of calculating Main Reserves is for insurance companies to take various preventive measures from the value of the reserve fund deficit.
When the reserve fund is in deficit, the insurance company will not be able to pay the customer’s policy, as was the case with Jiwasraya. The massive mafia case continues to escape the attention of the OJK, which should be able to easily obtain various information on reserve funds or Main Reserves in Jiwasraya’s business portfolio.
Reserve funds are important, because through this information an insurance company can take reactive or preventive actions such as:
Reject some profiles of prospective policyholders.
Take action to increase the portfolio of policyholders.
Refuse to pay customer claims because they are considered fraudulent.
Coordinate with shareholders to provide bailout funds or seek loan funds or seek funds through the sale of additional shares (Right Issue) and so on.
In the insurance company, of course, it has been filled by people who are good at probabilities and economics, so it is hoped that something unexpected can be minimized. In addition, insurance companies usually try to strengthen the legal side so that there is no loophole that can be exploited by the public or customers to get a claim bigger than what has been promised.
If you think about it more deeply, it is actually important for the Main Reserve business to know its value both by insurance employees and customers. However, because often the company’s financial affairs are classified as confidential company information, in the end the most interested party is the company itself. But with the outbreak of the JiwaSraya case in the last few months that the media started reporting on it, I came to understand that there is such a thing as an institution called OJK which is in charge of monitoring the financial health situation of an insurance company, including seeing whether the ratio of the Main Reserve value is at a safe level.
Main Reserve Ratio
If you study the rules in other countries, for example in the United States, there is a main reserve ratio that must be met by the insurance company, which ranges from 8 to 12 percent of the total premium that has been collected. However, this will vary in each country depending on the current situation and conditions.
Main Reserve is a component of technical reserves related to Premium Reserves. Where Technical reserve is a mechanism for managing funds by setting aside a portion of the premium received as an anticipatory measure against liabilities that may occur in the future, which consists of:
1. Premium Reserve
2. Unearned Premium Reserves.
3. Reserves on products associated with investments.
4. Claim reserve
5. Reserve of Disaster Risk
The main reserve is closely related to the insurance company’s obligation to pay claims submitted by policyholders. Claims from policyholders can come at any time with an uncertain amount. Therefore, insurance companies must have reserve funds that can be used whenever needed. This mandatory reserve fund is called the premium reserve.
Premium reserves are calculated based on the estimated total amount of compensation to policyholders that must be paid at maturity. Among other things, the prospective method, the premium difference formula method, and the paid-up formula.
Calculation of insurance risk (RA) for premium reserves for insurance products with a term of more than one year whose terms and conditions are non-renewable on each policy anniversary, as well as for products with a term of more than one year whose terms and conditions are the condition of the policy is renewable and provides other benefits after a certain period is determined using the following formula:
RA = max ((CP* – CP), 0)
CP* = premium reserve calculated with the best estimate plus a margin for deterioration risk with 95% confidence level of premium reserve adequacy (company level).
CP = premium reserve according to the statement of financial position (balance sheet) and in accordance with the company’s actuary calculations.
